CFPB Takes $37.5 Million Action Against Flagstar Bank Over Mortgage Servicing

The Consumer Financial Protection Bureau (CFPB) Monday announced that it has taken action against Michigan-based Flagstar Bank for violating the CFPB’s new mortgage servicing rules by illegally blocking borrowers’ attempts to save their homes.

The CFPB is ordering Flagstar to halt its illegal activities, pay $27.5 million to victims, and pay a $10 million fine.

The CFPB said that at every step in the foreclosure relief process, Flagstar failed borrowers. The bank took excessive time to process borrowers’ applications for foreclosure relief, failed to tell borrowers when their applications were incomplete, denied loan modifications to qualified borrowers, and illegally delayed finalizing permanent loan modifications.

“Because of Flagstar’s illegal actions and unacceptable delays, struggling homeowners lost the opportunity to save their homes,” said CFPB Director Richard Cordray. “The Bureau has been clear that mortgage servicers must follow our new servicing rules and treat homeowners fairly. Today’s action signals a new era of enforcement to protect consumers against the cost of servicer runarounds.”

In January 2013, the CFPB issued rules to establish new, strong protections for struggling homeowners, including those facing foreclosure. The rules were to protect mortgage borrowers from costly surprises and runarounds by their servicers.

Before the rules were slated to take effect in January 2014, the CFPB released a bulletin and interim final rule to provide greater clarity to the rules. The clarifications address communications with family members after a borrower dies, contact with delinquent borrowers, and treatment of consumers who have filed for bankruptcy or invoked certain protections under the Fair Debt Collection Practices Act (FDCPA).

Specifically in the Flagstar case, the Bureau’s examinations and investigation found that from 2011 to the present, Flagstar failed to devote sufficient resources to administering loss mitigation programs for distressed homeowners. For example, in 2011, Flagstar had 13,000 active loss mitigation applications but only assigned 25 full-time employees and a third-party vendor in India to review them. For a time, it took the staff up to nine months to review a single application.

In Flagstar’s loss mitigation call center, the average call wait time was 25 minutes and the average call abandonment rate was almost 50 percent. And Flagstar’s loss mitigation application backlog numbered well over a thousand. When the CFPB’s new mortgage servicing rules went into effect in January 2014, Flagstar committed violations of the new rules with respect to loss mitigation.

Under a consent order, Flagstar must pay $27.5 million to the approximately 6,500 consumers whose loans were being serviced by Flagstar and who were subject to its unlawful practices. At least $20 million of this will go to the approximately 2,000 victims of foreclosure. The company will also make a $10 million penalty payment to the CFPB’s Civil Penalty Fund.

In addition, Flagstar is prohibited from acquiring servicing rights for default loan portfolios until it demonstrates it has the ability to comply with laws that protect consumers during the loss mitigation process.